WEEKLY MARKET UPDATE

Both the long term and intermediate term trends remain up.  This past week the market opened slightly higher than where it closed the previous week and closed slightly lower.  For you who are familiar with candlestick patterns this past week indicated indecision.  In my opinion what happens next week will be critical in determining whether the intermediate term trends remains up or shifts down.  If next week closes above 169.86 the intermediate term up trend is confirmed and a further move up is highly probable.  If the market closes below 167.52 the intermediate term trend will shift down and a move down to the lower green lines is a distinct possibility.

Have a great weekend!

WEEKLY MARKET UPDATE

As you can see from the weekly SPY chart the market closed higher for the fourth consecutive week.  Both the long and intermediate term trends remain up.  What is interesting though; is if you look closely at the price bar, the range (high minus low) of the bar is the lowest of the last four weeks and it closed right near the high of 169.07 made in May.  Any of you who may be familiar with price patterns will also note that there is a potential double top setting up.  If the market closes particularly bearish next week, the probabilities strongly favor that the market will decline further over the intermediate term, with the potential to either test the lower green lines or just remain trading in a range between the lower green lines and the upper green line.

CONCLUSION

In a few recent posts I've had articles regarding hedging.  This is a time when I would consider at least putting on a partial hedge.  The market has made quite a move and is now challenging a major resistance level at 169.07.  If the market were to close very bearishly next week, then I would consider putting on a full hedge.  Have a great weekend.  

WEEKLY MARKET UPDATE

The long term trend remains up and for the third consecutive week there was a higher close.  More importantly the price range of last week was very bullish.  The market is only a couple of points away from the all time high in SPY made in May.  Last week I opined that it was likely that we may see the market bounce around for a while between the upper and lower green lines. That opinion has not changed.  Let's see what happens over the next week or two.

WHAT ABOUT THE FUNDAMENTALS?

On occasion I am asked if my analysis is heavily dependent on news or fundamental data.  The short answer is no.  Believe me I have charted a lot of fundamental data series against charts of the SPY and the only two things I have found useful is the Federal Funds Rate and the yield for 1 year treasury notes.  As you may or may not know the stock market is very sensitive to the actions of the federal reserve, particularly as it relates to interest rates.  In simplest terms if the Fed is raising interest rates during a rising stock market, eventually yields on other investments (like treasury notes) start becoming more attractive.  On the other hand when the Fed starts lowering rates during a falling stock market, this eventually translates to lower yields on other investments and investors start looking back to the stock market.  Take a look at a monthly SPY chart below.  In the top pane is the SPY, in the next pane I've charted the Federal Funds Rate and in the bottom pane the 1 year Treasury Note Yield.  Now take a look at the blue lines drawn on both as you compare to the price of the SPY.  You should note that it wasn't too long after both series rose above 5% that the bear markets of 2001 and 2008 began.  Conversely, the stock market bottomed in late 2002 and in 2009 not long after both series declined below 2%.

CONCLUSION

I have some ideas for future posts but I would really like to get some feedback from my readers.  If you have anything you would like to see I am interested.  I hope you all have a great weekend.

WEEKLY MARKET UPDATE

The long term trend remains up.  This week the market closed higher than the previous week so the intermediate term trend is pointing back up.  Last week I said that if there was a strong weekly higher close I would be more convicted that the high made in May (upper green line) would be retested.  Although we got a higher close, it was not a particularly bullish close.  However, it was a shorter week due to the holiday.  The lower green lines remain strong support and the upper green line strong resistance.  Based on recent price action I think that there is a strong likelihood that we may just see the market bounce around between these levels.  But for now, both trends are pointing up.

HEDGING

As I stated last week the primary objection to hedging is the cost.  I also went on to say that over the long run an investor who prudently hedges will come out ahead.  So what does prudently hedge mean?  Simply, you want to keep the cost of hedging as low as possible so you can enjoy similar returns to the investor who does not hedge when the market is rallying strongly while at the same time strictly defining your risk when the major market correction does come.  My model or blueprint of how to do this is as follows:

1)    When an intermediate term buy signal is given I begin selling covered calls against the underlying.  Each month I will sell calls above the current price of the market.  I choose a strike price at about a 30 delta.  I will sell calls at about a 50% ratio to the stock.  What this means is if I own 200 shares of the SPY I begin selling calls.  I will sell only one SPY call (equivalent of 100 shares of SPY).  The primary objective is to accumulate cash in my account to either largely reduce or in some cases entire pay for the cost to hedge when that time comes.

2)    Hedge only when you need to.  I use an intermediate term timing model/system to help me do this.  I typically would buy ¼ to ½ the number of puts I need when the model/system tells me that the market has moved too far in an up trend and is likely to have a larger than normal correction.  I buy the other ½ - ¾  when an intermediate term sell signal is given.

CONCLUSION

I should point out that selling calls as described above is only workable outside of a 401-K.  If most of your funds are in a 401-K, you wouldn’t be able to enjoy the benefit of using call premium to pay for your hedge.  But you would still keep the cost of hedging low by using a good intermediate term timing model/system to tell you the optimum time to put on the hedge.